Britons in the red: More people dip into overdraft or turn to buy now, pay later to cope

Britons are increasingly tapping into their overdraft and using buy it now, pay later (BNPL) schemes in order to cope with the rising cost of living, new research has found.

Overdraft usage among UK bank account holders has increased by 7.1% since August 2021, according to new data from credit market ClearScore, which assessed 20,000 UK bank accounts using open banking technology .

ClearScore’s open banking figures also show the impact of rising inflation on household spending.

In the red: Use of overdrafts by bank account holders in the UK has increased by 7.1% since August 2021, as household finances continue to be under pressure

He revealed that essential spending – including groceries, bills, fuel and rent – has risen 25% since August last year, with wage growth lagging the same period at just 10%.

As a result, essential expenses as a proportion of income have increased by 6% as prices rise and income does not follow.

More than half of UK adults feel worried about their financial situation, and many are making changes to cut back where they can, according to separate consumer research by ClearScore.

He revealed that many people are planning ways to navigate the coming months, including consolidating their existing debts and dipping into their savings to pay for day-to-day expenses.

However, worryingly, one in four Britons said they were likely to continue to rely more on their overdrafts over the next six months.

Buy now, pay later

There is also evidence that Britons may become increasingly dependent on buy-it-now and pay-later services to maintain their way of life.

More than two-thirds of BNPL shoppers are using these services more than ever due to rising prices, according to a separate report by price comparison and financial guidance platform Forbes Advisor.

BNPL allows buyers to stagger payments for goods, often without interest or charges, unless they fail to repay the money on time. Popular providers include Klarna, Clearpay and Afterpay.

Solution shopping: almost two in five people aged 18 to 24 say they use BNPL to follow fashion trends

The flexible payment method has grown in popularity in recent years, with more than a quarter of Britons now using BNPL, according to the study.

BNPL shoppers aged 18-24 were the most reliant on these payment methods, with four in five increasing their spending in the past six months, the study found.

Those aged 25-34 have also dramatically increased their spending on these services, with three-quarters using them more regularly as prices rise daily.

Worryingly, the study also found that people were taking advantage of these services to spend beyond their means.

Almost a third used BNPL to make payments outside of their budget, and more than a quarter used these systems as an alternative to a credit card after being rejected.

The research also found that BNPL buyers routinely fail to repay their debt within a few months of making purchases, which usually means they will incur costs and could have their details passed on to debt collectors.

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Debt problem: Young people have always been the main target market, with ads encouraging users to spend on popular fashion and lifestyle brands

Nearly a quarter of users missed monthly payments and more than one in four skipped them at least every few months.

Unsurprisingly, young people are having the most difficulty keeping up with repayments.

Almost two in five people aged 18 to 24 said they missed monthly payments and more than a quarter skipped them at least every few months.

So how much is spent?

On average, Brits who use BNPL take on £160 extra debt a month, according to the Forbes Advisor report.

18-24 year olds are the biggest spenders, with spending reaching over £200 a month on average.

Electronics are the most common items purchased through BNPL services, with nearly a third of users making a purchase this way in the past six months.

Almost a quarter buy luxury items such as designer clothes, jewelery and handbags.

Fashion, beauty and lifestyle brands are also popular spending categories among these payment methods. More than one in six also used BNPL to buy takeout.

Forbes Advisor finance expert Laura Howard says highlighting the potential dangers of BNPL is necessary, especially for those who are already financially strained or who may not have much financial experience.

“The appeal of BNPL is obvious,” says Howard. “It puts the products within reach of people who cannot afford the ticket price up front and who may not have access to other forms of credit.

“But the lure of being able to buy something immediately shouldn’t tempt people into a financial arrangement they can’t manage or afford.

“If you are late with your payments, you risk incurring fees and you could end up sullying your credit report, making it more difficult to secure financial products at a later date.

“Using credit services such as credit cards and personal loans means meeting repayment schedules or facing penalties that can be costly and far-reaching.

“People should keep this in mind when deciding whether to use an BNPL program or, indeed, any other credit product.”